The Iranian connection in Turkey’s corruption scandal

Nader Habibi, the Henry J. Leir professor of the economics of the Middle East in the Crown Center at Brandeis University, writes that the uncovering of Turkey's recent corruption scandal has shed light on some of the methods used by Iran to evade international sanctions. Turkey and Iran, he explains, have a strong economic relationship, and Iran has leveraged the strength of that relationship to enlist Turkish businessmen in their efforts to export restricted goods. These revelations, Habibi argues, could strain U.S.-Turkey relations going forward.

By Nader Habibi

The recent corruption scandal in Turkey has exposed a hidden dimension of the complex economic and commercial relationship between Iran and Turkey. In an attempt to overcome its trade isolation and international sanctions, the government of Iran deliberately and strategically expanded its economic relations with Turkey over the last decade and positioned itself as the second leading supplier of natural gas to that country. Bilateral trade relations between the two countries have experienced many ups and downs as a result of geopolitical differences and U.S. pressure on the Turkish government, but until 2011 they enjoyed a general uptrend.

Iran's trade with Turkey

Source of Data: Direction of Trade Statistics (IMF) and Turkish Ministry of Economy.

During March–November 2013, Turkey was the fifth largest exporter to Iran after China, Iraq, UAE, and India. Turkey exported $2.56 billion in merchandise goods to Iran. At the same time, Turkey is also the largest importer of natural gas from Iran. An earlier statistical report shows that during January–September 2013, the volume of Iran’s exports to and imports from Turkey stood at $8.0 billion and $3.4 billion, respectively. As large as these figures are, they point to a 39% decline in volume of bilateral trade between the two countries in comparison to the January–September interval in 2012. This decline is a direct result of sanctions and the pressure that Western nations have put on Turkey to curtail its economic ties with Iran.

The economic ties between Iran and Turkey, however, go beyond trade and involve a growing volume of business investments. When, starting in 2008, the United States pressured the UAE to cut back its trade and investment ties with Iran, thousands of Iranian businesses that were active in Dubai shifted their investments to Turkey.  As a result, the number of Iranian-owned businesses in Turkey rose from 319 in 2003 to 1,470 in 2010 and then rose further to 2,072 firms by 2011. While most of these firms engage in ordinary commercial or manufacturing activities, some of them have been involved in procurement and transport of goods that have been subject to Western sanctions against Iran. Reza Zarrab, the young Turkish businessman of Iranian origin (from a prominent entrepreneurial family in northwestern Iran) who was arrested in Istanbul on December 17, was actively involved in trade and financial transactions with Iran. His main business partner in Iran was Babak Zanjani, who is himself under investigation in Iran for his financial dealings with the oil ministry. He was arrested in Tehran on December 30.

Zanjani is one of a number of Iranian businessmen who has used his overseas businesses to help the Iranian government evade international sanctions. In close cooperation with Iranian Revolutionary Guards and various ministries, the front companies of these businessmen have been involved in both procurement of sanctioned goods and the transfer of Iranian government’s export revenues. The firms that Reza Zarrab founded in Turkey since 2008 have had close ties with the network of Babak Zanjani’s firms in Iran, Turkey, Malaysia, the UAE and Russia. It was through transactions among these firms that Iran was able to partially bypass international financial sanctions. The Turkish media, based on reports of the anti-corruption investigations in that country, have claimed that the volume of these transactions from 2009–2012 amounted to $119 billion.

Turkey's national gas imports

Source data: http://www.naturalgaseurope.com/turkish-gas-sector

Transferring gold cargos betwen Zarrab and Zanjani firms in Dubai, Turkey, and Russia was the main mechanism in this elaborate money laundering scheme for the government of Iran. As a result of these activities, Turkey’s direct and indirect gold exports to Iran rose sharply in 2012 and contributed to the large decline in that country’s trade deficit with Iran as shown in Figure 1.  The AKP government of Mr. Erdogan did not directly support these transactions, but it chose to look the other way because of its need for Iran’s oil and gas. Despite U.S. and European diplomatic pressures, Turkey was reluctant to reduce its hydrocarbon imports from Iran because doing so would have made Turkey more dependent on Russia for natural gas.

Turkey reluctantly complied with international sanctions by mid 2012. Under international sanctions, the Turkish government was not able to pay for its oil and gas purchases from Iran in euros or dollars, so it convinced Iran to accept Turkish lira for these payments. The payments were deposited in Iran’s account in a state-owned Turkish bank called Halkbank. It appears that in return for Iran’s acceptance of Turkish lira, the AKP government tolerated the operations of businessmen like Zarrab who converted Iran’s export revenues into gold and transferred it to Iran under disguised financial transactions among above-mentioned firms. Zaraab is accused of having paid bribes to several Turkish officials and their relatives to facilitate these transactions.

Zarrab has said that many of his transactions, which are currently under investigation, were part of his business dealings with Babak Zanjani. Several members of Iran’s parliament have accused Babak Zanjani of owing large sums to the National Oil Company of Iran (NIOC).  When faced with repeated accusations of corruption, Babak Zanjani stated that his companies sold billions of dollars worth of crude oil and oil products on behalf of the government of Iran to clients in various countries. A portion of these sales proceeds were transferred to Iran through Halkbank and Reza Zarrab’s firms.  

The “Gold for Gas” corruption scandal has shed light on the complex and often contradictory relationship of the Turkish government with both Iran and the United States. Despite growing tensions between Iran and Turkey over Syria, Turkey has continued its bilateral trade with Iran and offered only partial cooperation with U.S. and European economic sanctions. At the same time, the AKP government has tolerated Iran’s sanction-evading activities while appearing to comply with some sanctions on the surface. This balancing act between Iran and the United States has served Turkey’s economic interests until now, but the exposure of the corruption scandal could prove damaging and costly to its relations with both governments. Luckily for the Turkish government, this scandal has come to surface at a time when both the Obama and Rouhani administrations are interested in preserving the November 24 interim nuclear agreement. This means neither government is interested in diplomatic tension with Turkey over this issue, which might damage ongoing nuclear negotiations.

However, both President Obama and President Rouhani face domestic opposition groups who do not support the deal and advocate agendas that are more confrontational. These groups might try to exploit Turkey’s Gold for Gas scandal. In Iran, conservative opponents of former President Ahmadinejad are pressing for full prosecution for Babak Zanjani—who had a close relationship with Ahmadinejad during his presidency—in order to further discredit the former president and his supporters. The trial of Babak Zanjani can shed more light on his cooperation with Zarrab for fund transfers. These revelations may cause more trouble for Prime Minister Erdogan, who is trying to contain the scandal. As more evidence of the large magnitude of fund transfers comes to the surface, conservative opponents of President Obama are likely to become more vocal in their criticism of his implementation of financial sanctions. In response to these criticisms the Obama administration may feel compelled to demand more compliance from Turkey.  

Nader Habibi is Henry J. Leir professor of the economics of the Middle East in the Crown Center at Brandeis University, where he is also senior lecturer in the Department of Economics.